Is the FTC ramping up regulation of the MLM Industry?

Federal Trade Commission Chairwoman Edith Ramirez argued on October, 2016 at the DSA Policy Conference that it was time to ratchet up regulation of the direct selling industry, and not a time to “put the brakes” on more regulation of the $36 billion industry and its 20 million strong sales force.

The FTC and the Direct Selling industry are clearly of the same opinion of the basic goal that the direct selling industry should prosper through effective and ethical practices. However, FTC Chairwoman Edith Ramirez emphasized new legal standards that would abandon a 40-year old gold standard, the Amway Safeguards Rule, and that would also upend and call into question decades of industry accepted business practices.

Briefly, the Chairwoman argued for:

Abandonment of reliance on the Amway Safeguards Rule as a key test for legitimacy.

Effectively creating a new legal standard patterned after those requested by the FTC in the FTC/Herbalife settlement that, in reality, may upend decades of industry accepted practices and rewrite 40 years of court legal standards.

The existing Court standard derives from:

(1) Koscot … Compensation to upline should be based on sales to the ultimate user.

(2) Amway … A program that enforces the Amway Safeguards of a retailing mandate to qualify for MLM commissions, a 70% rule that prohibits ordering unless product is sold or used and a reasonable buyback policy for inventory for terminating distributors, if effectively enforced and in conjunction with avoidance of inventory loading, is indicative of legitimacy. (Also, Amway did not challenge recognition of distributor personal use purchases as legitimate sales to the “ultimate user”.)

(3) BurnLounge … The primary motivation for distributor purchases should be the purchase of product in reasonable amounts for resale or use as opposed to mere qualification in the program for rewards. A pyramid analysis will be “fact driven.”

On the FTC wish list for a new paradigm for legitimacy is:

(1) Abandonment of the reliance on the Amway standard.

(2) Redefining Koscot to require compensation to upline to be based on sales to the nonparticipant retail customer rather than the ultimate user.

(3) Adopting the FTC/Herbalife settlement “punch list” of mandates in lieu of the factual analysis of “primary motivation,” called for in BurnLounge, including:

(a) Only one-third of MLM compensation to upline should come from personal use by downline distributors, whether or not such purchases are reasonable in quantity for use by the distributor “ultimate user.”

(b) Autoship to distributors should be prohibited.

(c) Monthly activity volume requirements may not include any purchases by distributors.

(d) Tracking of performance activity connected to wholesale purchasing should be banned.